{"id":45854,"date":"2016-01-23T22:35:57","date_gmt":"2016-01-23T21:35:57","guid":{"rendered":"http:\/\/pointblanknews.com\/pbn\/?p=45854"},"modified":"2016-01-23T22:37:55","modified_gmt":"2016-01-23T21:37:55","slug":"financial-times-calls-nigerias-economic-approach-the-height-of-foolishness","status":"publish","type":"post","link":"https:\/\/pointblanknews.com\/pbn\/exclusive\/financial-times-calls-nigerias-economic-approach-the-height-of-foolishness\/","title":{"rendered":"Financial Times calls Nigeria’s economic approach “the height of foolishness “"},"content":{"rendered":"
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Naira devaluation talk grows stronger as Nigeria also adopts Chinese-type circuit breaker<\/p>\n

Nigeria plans to create a $25 billion fund with public and private financing to modernize infrastructure and avoid a recession.<\/p>\n

Copying Venezuela\u2019s exchange rate policy and China\u2019s failed equity market strategy might seen the height of foolishness.<\/p>\n

But, at least in the opinion of John Ashbourne, Africa economist at Capital Economics, that is precisely what Nigeria, the continent\u2019s largest economy, has just done.<\/p>\n

\u201cLow oil prices are battering Nigeria\u2019s export-dependent economy, but it\u2019s the government\u2019s market-distorting response that risks pushing the country into a Venezuela-style crisis,\u201d Mr Ashbourne says.
\n\u201cNigeria is sliding towards a Venezuela-style FX regime and adopting a Chinese-style stock market circuit breaker. Neither will reassure foreign investors, many of whom seem to be eyeing the exits.\u201d
\nBoth measures were announced after markets closed on Friday, January 15.
\nThe circuit breaker on the Nigerian stock exchange, one of the worst performing in the world this year with a fall of 17.7 per cent, will pause trading for 30 minutes if stock prices fall 5 per cent. Trading will cease for the day if it is triggered twice in a session, or after 1.45pm.
\nThis month, Beijing abandoned a similar policy after just four days, concluding that in a falling market the existence of the circuit breaker encouraged more selling as traders rushed to exit while they could.
\n\u201cThe effect is akin to calling last orders at a crowded bar,\u201d Mr Ashbourne says. \u201cIt is hardly confidence-inspiring that Nigeria is copying a Chinese policy that is widely seen to have failed.\u201d
\nHe accepts that Nigeria\u2019s circuit breaker may not be as badly designed as the Chinese version. Whereas the NSE All Share index rarely falls by 5 per cent a day, the Shanghai Composite did so a dozen times in 2015. The NSE\u2019s version has not yet been called into action.
\nNevertheless, Mr Ashbourne says that using a circuit breaker to shore up the market, rather than to avoid volatility, is \u201cdeeply flawed\u201d.
\nSimultaneously, the central bank has said it will stop selling US dollars into the interbank FX market.<\/p>\n

Nigeria has operated a de facto twin currency system for the naira since February 2015, when the bank held the official interbank rate at N199 to the dollar to avoid a spike in inflation. The unofficial rate, available at bureaux de change, has plunged to N300\/$, as the first chart shows.
\nHowever Mr Ashbourne argues the latest move takes Nigeria a step along the road to a Venezuela-style scenario, where the dollar now buys 913 bol\u00edvars on the black market, according to dolartoday.com<\/a>, compared with an unofficial rate of 6.28\/$.
\n\u201cSuspending US dollar sales to the interbank market will force consumers and firms to source dollars at bureaux de change,\u201d he says, while providing an implicit subsidy for companies and individuals with the connections needed to access the official rate.
\nAs the second chart shows, Nigeria\u2019s reluctance to let the naira\u2019s official exchange rate weaken means it has borne the brunt of the sharp fall in oil prices since the middle of 2014.
\nIn naira terms, the oil price has fallen from $115 a barrel to around $35, with the modicum of weakening permitted so far doing little to take the edge off the fall in oil prices to $28 in dollar terms.<\/p>\n

In contrast, Russia, which has allowed the rouble to fall sharply, is still seeing oil prices of around $65 in local currency terms, with many other oil exporters such as Brazil and Azerbaijan also seeing more cushioning of the blow than Nigeria.
\nCharles Robertson, chief global economist at Renaissance Capital, who drew up the second chart, expects Nigeria to bow to the seemingly inevitable and devalue the naira, given that his calculation of fair value is N305\/$, very close to the current black market rate.
\nHe notes that frontier market funds are now underweight Nigerian equities, and believes that international investors \u201care likely to remain on the sidelines,\u201d barring an obvious catalyst for change.
\nNevertheless he believes a devaluation to N250\/$, \u201cwhile no longer sufficient to ease all dollar shortages … would be good enough to warrant investors taking a fresh look at Nigeria, especially if they expect a rebound in the oil price\u201d.
\nDaniel Salter, global equity strategist at RenCap, has been busy analysing just when equity market investors should consider returning to a freshly devalued Nigeria, if history is anything to go by.
\nMr Salter analysed 13 emerging market currency devaluations since 1994 in countries ranging from Mexico and Turkey to Egypt and South Korea.
\nHis conclusions are that it is rarely worth buying in anticipation of a currency devaluation and that, on average, equity markets do not hit their low point (in dollar terms) until 99 days after the start of the currency devaluation.<\/p>\n

This delay can vary significantly, though, as the final chart shows. In the case of South Korea in 1997 the stock market troughed the day before the won started to fall. In Nigeria itself, in 2009, this point was reached after 35 days.
\nHowever in the cases of Thailand (1997), the Philippines (1998) and Egypt (2001), it would have paid equity market investors to stay out for at least six months.
\nMr Salter believes the lag is due to two factors: the initial devaluation is often insufficient to stabilise the currency; and that devaluations frequently coincide with banking crises.
\nUnfortunately, this analysis probably tells us little about how Nigeria\u2019s equity market is likely to behave in the year after any devaluation.
\nIn the 13 previous episodes, the stock market typically fell 3 per cent in dollar terms in the three months after the start of the devaluation. However, as the above chart shows, there has been huge variability in this figure, from -56 per cent in Mexico in 1994-1995 to +100 per cent in South Korea in 1997-98.
\nLikewise, on average the typical stock market gained 4 per cent in dollar terms in the year after the devaluation, but once again this is the average of a widely dispersed data set, with the returns ranging from -86 per cent (Indonesia, 1997-98) to +172 per cent (South Korea).
\nThe sector breakdown perhaps delivers a clearer message. RenCap found that consumer staples stocks have tended to outperform in the 12 months after the start of a devaluation, while consumer discretionary companies and industrials tend to pick up once the currency has bottomed.
\nFinancial stocks, in contrast, tend to be the worst sector in the year after a devaluation, probably due to declining credit quality.<\/p>\n<\/div>\n<\/div>\n<\/div>\n

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by jenny downing<\/span> on<\/div>\n<\/div>\n<\/div>\n
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